ECONOMY GIVES FED NO REASON FOR PAUSE / THE WALL STREET JOURNAL

Economy Gives Fed No Reason for Pause

A quiet summer means the Federal Reserve is even more likely to keep raising rates than investors believed at the beginning of the season.

By Justin Lahart

Welcome back from summer vacation! As far as the Federal Reserve is concerned, not much happened while you were gone. That leaves them on track to keep tightening.

Oh sure, there was news. Trade tensions simmered. Turkey and Argentina ran into the shoals. British politicians allowed that next year’s Brexit will be very serious and have taken hard steps toward having more meetings to discuss that seriousness. Controversies swirled around President Trump and were stirred by him. The Mets fell apart. 
But the types of big worries that have rattled markets in summers past weren’t there and the existing, mostly benign trends were. The economy keeps powering along and corporate profits, with the extra sweetener of this year’s tax cut, continue to swell. Inflation is trending right at the Fed’s 2% target, and the unemployment rate keeps drifting lower.


Fed funds futures imply the odds of two more rate increases by the Federal Reserve this year are about 70%.


Fed funds futures imply the odds of two more rate increases by the Federal Reserve this year are about 70%. Photo: chris wattie/Reuters


Anybody who on Memorial Day thought the Fed might find a reason to hit the pause button on rate increases needs to update his or her thinking. Investors have done that to some extent. Fed funds futures imply the odds of two more Fed rate increases this year—one at this month’s meeting and one at the December meeting—are about 70%. That compares with about 50% after the June meeting when the Fed last raised rates.

Investors may need to further raise those odds as they return to work refreshed. While there are some uncertainties hanging over the economy, the chances of it materially slowing down this year seem slim.

Next year, when the tax-cut stimulus starts to fade, tariff effects become more pronounced and Brexit is scheduled to occur, could be a different matter. But that is next year.